Cirrus Logic, Inc. (CRUS) Earnings Call Transcript & Summary

All right. Good morning, everyone. Same room, same introduction. I know some people who have been with me for the last couple of sessions, so we'll really -- thank you all for coming to the first morning of the TD Cowen TMT Conference. This is the 50-odd years of the tech conference at Cowen. The first one including all of our new partners at TD and all the new resources that, that deal brings to bear. So I'm still exploring some of those resources myself. But really appreciate everybody coming out and attending. And hopefully, we can have a fun discussion. Really pleased for Venk and Carl from Cirrus Logic to be with us to talk about their business and some exciting things that are happening and a few unexpected ones along the way. But thank you guys for making the time to be with the team. I don't know if you want to spend a little bit of time. It's a dynamic market out there. There's been a few changes in the near term sort of forecasting around some products. So I don't know if you guys want to just kind of kick it off and spend a couple of minutes talking about the near-term dynamics and how you're thinking about things with the business right now. And then I've prepared a bunch of questions. But as many of you guys know, I'm about as informal as I get. So if you want to participate in the conversation or if you have questions in the audience, just flag me or wave your arms around and we'll make sure to get all that addressed. But thank you guys for your time.

Yes. Okay. Thank you, Matt, and thank you for inviting us, and good to see a lot of people in the audience. So I'm happy to talk about the near term, but since I see a lot of new faces, I just thought it would be helpful to give a little bit of backdown about Cirrus and then happy to go into any specific questions that you have. So at a very high level, Cirrus Logic, we've been in business for 35 years, one of the top producers of analog chips and mixed-signal chips primarily in the space of audio. And especially in the last few years, we've made a pretty good transition from continuing to do well in audio, but also expand our portfolio into what we call high-performance mixed-signal or HPMS product lines. And just to put it in context, over the last 4, 5 years, we've gone from predominantly being audio driving most of the business to almost 35% to 36% of our revenue in the last few years coming from -- especially this last fiscal year that we ended coming from high-performance mixed signal. And that's a combination of several products that span a lot of different technologies from things like haptics and sensing products. We have power conversion, camera controllers and so forth. And so we've made the steady progress in terms of going from predominantly audio to now a combination of audio plus high-performance mixed signal. So that's number one. And then if you look at the strategy of the company, we have 3 different prongs of the strategy that pretty much drive where we are today, but also where we're headed over the next few years. And the first part of it is continue to do really well in audio and in smartphones, and that's the position that we've established really well over the last several decades and continue to do well there. The second part of the strategy, as I alluded to earlier, is to expand into high-performance mixed-signal. And we've done a pretty good job of doing that, especially not only a large customer, but we've expanded into other markets as well. And then the third part of it is how do we expand beyond smartphones into a multitude of other markets where we do have pretty much like an analog business model where you do serve a wide slew of customers across multiple end markets. And that's a strategy that we are continuing to execute on. So that's very high level Cirrus Logic in terms of where we've been, where we're going and how we have performed, okay -- no, again, it's a strategy. Now to answer your specific question about the near term. For those of you who have been following Cirrus quite closely, you all know that we've had a pretty successful execution across our HPMS or high-performance mixed-signal content expansion. So as much as the fact that we have grown our content in not only a top customer, but other customers in HPMS from 4 or 5 components in one of the top customers' products to, in some cases, 7, 8 or 9 components. So that's been a very classic example of content expansion across different technologies and different products, and we've done it really well. What happened about 1.5 months ago was we got indications from our customer, we were expecting to introduce a brand-new HPMS product line in the upcoming customers' new product launch. And that's something that's got -- that's no longer part of the plan. So we communicated that on the earnings call. And we said, hey, we have little visibility in terms of being able to get that in the current model. And beyond that, it's -- the situation is dynamic. But suffice it to say that our HPMS content growth story is still pretty solid. We've expanded our content, as I said before, across multiple dimensions. And we continue to expect that HPMS content to grow over time. And what we did talk about in the most recent earnings call is much more of a short-term phenomenon in terms of that particular socket. We were expecting to ship in the upcoming new product launch from our customer, that's being pushed out. So that's basically where we stand today in terms of the near term and happy to answer any other questions or if you want to -- Carl, if you want to add anything to that?

That's good.

No, Carl, I think -- thank you for that. And we'll dive into different pieces of that. Carl for -- you and I have known each other for years and years, but for folks that are going to see you guys in one-on-one meetings the rest of the day. Maybe you could just tell us what's under your remit now at Cirrus and what you're spending your time doing and maybe that will help inform sort of the rest of the conversation as well.

Yes, sure. And again, thanks for hosting us. So I've been with the company for 24 years next month. And my most current remit involves product planning and product road map development. Across all of our product lines, so our audio and our HPMS product lines, my product teams are responsible for cultivating relationships with key customers and driving the products and definition of those products and then the execution of those products and getting customers to pay us for them. So obviously, as Venk mentioned, the core of the strategy is still rooted around audio. We've grown significantly in HPMS. And I think that's a testament to just the trust that customers have in us as clearly being able to execute high-quality, high-performance analog and mixed-signal products, just extending beyond audio but becoming a trusted supplier for mixed signal. So my teams are working to define the next kind of wave and kind of expansion opportunities, not only in smartphones, but then obviously looking beyond that into new markets and applications.

Makes sense. Just -- I'm going to dig into a little bit, there was the specific situation that you mentioned with the new product, Venk, but -- and I'm not -- I mean, obviously, that was going to bring some revenue and financial benefits to it if it had happened. I'm not really personally worried about that. I wanted to explore -- and the questions that I've been getting from investors are just sort of what that unexpected transition means or does it mean for the business long term? So one of the decisions that the company has made, I think, in the last 3 or 4 years is as you guys know, I used to get questions all the time. Okay, when are we going to do Android, when are we going to do build Android, how are we going to diversify out of a large customer? And then there seemed to be a strategic focus of -- we have way, way more shots on goal with that customer that have a higher probability of success and way more unit visibility and timing visibility than we might have going into broader Android markets, et cetera. And so that is the question that I've been getting and the crux of the question is, did that sudden change of the customer changed the view at all, Carl, of your team and how you're developing products to service that customer? Or strategically, how you're thinking about diversifying the customer base versus reinvesting for more shots on goal with a large customer?

Yes. In my view it has no -- it didn't change our long-term outlook. I mean, like, doing innovative new technology enabling new use cases and new technology is tricky and complicated. So from our perspective, it doesn't change our view on the long-term opportunities to grow and expand our content and capitalize on the opportunities with a lot of shots on goal. And frankly, a 15- to 16-year track record of being very, very predictable on our end as we remain to be in terms of predictable execution of complicated technology. And sometimes there are near-term headwinds, but we obviously still manage for the long term and feel really good about not only the opportunities to expand content within audio, but also the HPMS products. And then some of the teams are really, really focused on expanding our general market product portfolio to reinvigorate some mature products that service industrial, automotive and other kind of pro audio related kind of applications as we drive long-term diversification. So the teams are focused on both elements because we do certainly still see a meaningful opportunity for growth of content in phones with our biggest customer and in the other kind of mobile-related applications as well, but we're certainly driving for both.

And let me just add to that. From a capital allocation standpoint, as we look at our investments in R&D, we still see quite a bit of opportunity, especially with a large customer. But from a diversification standpoint, we are allocating capital just as much to other opportunities. I mean one of the underrepresented aspects of Cirrus is that when you look at the business, there's obviously a lot of revenue from our top customer, and that's been growing over time. But we're also making good progress in terms of the non-Apple business, so to speak, which is essentially spread across a whole slew of different end markets. We have some in [ prosumer ] , some in automotive, industry and so forth. And to Carl's earlier point, we are making investments in that in terms of refreshing the portfolio as we see quite a few opportunities that present itself over the coming years. So it is a multipronged strategy where we continue to see tremendous opportunity with our top customer and nothing has changed as it relates to our view on that customer engagement and the tightness of the relationship and the partnership that we have. But it proves us also to continue to look at other markets where we are able to bring some of those technologies and capabilities to bring to bear on those market opportunities, which we are continuing to invest in as well.

Just to follow up on that. So maybe, Venk, you can talk about your time as CFO at Cirrus, what you thought coming in, maybe what changes you guys have made? And the reason I asked the question is it sounds like there may be a new emphasis on existing products in the portfolio and monetizing them outside of the handset market. Is that -- I don't know, is that fair? Is that something that you're driving? Is -- how has that come about?

Yes. Great question. Thanks for that question. So just for perspective, I've been in the analog space for a long time. And one of the key things -- and obviously, a lot of people in analog and semiconductors in general tend to do business with a lot of the consumer end market players but also in other end markets. And I can tell you quite categorically that as it relates to our top customer, the level of engagement that we have, the level of partnership that we have is truly outstanding. And that continues, and that's if anything even more solid as we go forward as we see the opportunities in front of us. As it relates to the other markets, there is clearly an opportunity for us to take what we have and what we have developed for these consumer markets. And a lot of the capabilities that we bring to bear, things like digital to analog converters and ADCs are technologies that span multiple end markets. So we have the opportunity to repurpose some of those capabilities and technologies into other markets. And part of our investment going forward is how do you refresh those products and the portfolio, which has served these broad markets and continue to emphasize the technology advantage that we have so that we can proliferate those markets in a much more meaningful way. So going back to my capital allocation comment, it is a good balance between continue to invest in the opportunities of the top customer, which we see a lot of visibility into, but also expanding the capability and the product set into new markets and refreshing that portfolio and making sure that we have diversified growth going forward.

That makes sense. I did want to ask a few -- and some of this we touched on in live Q&A on your last earnings call and then when I spoke to you guys that evening afterwards. But if there's -- I'll say ahead if there's pieces of it that you can't talk about just tell me to shut up and we won't talk about it, but the sequence of events that led to the content change at the large customer, it was really late on. I guess, one, maybe you could just confirm that no issues or anything with your product specifically. I think we talked about that if you guys could just kind of confirm that, no issues on your end. Is that fair?

Absolutely.

And in fact, the change was made late enough that you guys were already running wafers and we're building parts. And so the question that I ask on -- I guess, on the live call and we tried to dig into it since is how is that conversation going since, right? The products that Carl's teams develop for that customer tend to be custom. And there's a bunch of R&D and other investments that are made in making those products and getting all the way to the point, not just to tape out to actually running lots of wafers and things like what's happened since? Is it just like, [ Kumbaya ]. We move on to the next one. Is there any kind of help that they're giving you guys in compensation for all the money, time and effort spent? Is it just -- I don't know, double down on the relationship. How is that going? And is there anything that you can share with the folks about what might have happened since?

Yes, I'll start and then obviously, some of those things we can address. Others are kind of a fluid decision, and I'll turn to Carl for more detail. But first to address your point about the timing of it. Obviously, it happened just a couple of weeks prior to the earnings call. So absolutely categorically you can state that the chip that we produced work exactly as specified. And we've got indications from the customer as well that in addition this has nothing to do with our chip. So I want to make sure that that's happened and we cleared. We've had a tremendous track record of executing on time to specifications and so forth, and nothing has changed even as it relates to this particular product, that's number one. Number two, to your point, we were building along -- we've started some wafers primarily because of the timing of the introduction of that product. And so we can't get into the specifics of exactly what the quantum of it is, but we are in active discussions with that customer, very constructive dialogue that's going on right now. And I'll turn to Carl to give more details on that.

Yes. I mean there's a ton of other details that we can really cover off other than just to reemphasize, I mean, if you look back across our entire history and frankly, across not just Cirrus but I think this is pretty unprecedented in terms of timing and just where we were in the process. And obviously, we've been a really close partner and supplier for, again, more than 15 years. And I think there's clear recognition of the amount of energy and work and effort and investment that's gotten into this. And obviously, the situation is fluid. And at the end of the day, we want to help enable the best technology and the best user experiences to be deployed into the market, and that's what we're focused on. And the rest of the conversation is pretty ongoing and fluid. So...

I appreciate that it's sensitive area.

Sorry, I just wondered if you could clarify because I think you said earlier that this specific content program was pushed out, was it actually canceled. It seems like redesign [indiscernible]. And also just other programs you were basing on that design, was there a much of that redesign?